Are zero-rated apps a form of market segmentation?

by on August 28, 2014 at 2:24 pm in Economics, Uncategorized, Web/Tech | Permalink

One major advance in knowledge over the last twenty-five years of research in industrial organization is just how important — and how possible — market segmentation agreements and institutions may be.  Is this another example?:

…this summer the service provider T-Mobile began offering its customers an alternative. Under a free feature on some plans, T-Mobile users can now stream music services like Pandora, iTunes Radio, Rhapsody, and Spotify all day long without having to worry about sapping their data caches.

T-Mobile calls it “Music Freedom,” and it’s part of a quiet but powerful global trend.

Apps and Web sites that don’t count against the users’ data plan are popping up both in the United States and abroad, often under names like Wikipedia Zero or Facebook Zero. “[W]e hope that even more people will discover the mobile Internet with Facebook,” the company blogged in announcing Facebook Zero in 2010.  (The names are a riff on “zero-rated,” an economics term for products exempt from taxation.) But set against the ongoing dispute over so-called net neutrality, those apps are beginning to spark a debate about the future of an open, equal, and vibrant Internet in the United States and abroad.

And there is a trade off for consumers. In return for low-cost service, users are, in some cases, being corralled into a limited view of the Internet. Rather than wandering freely from site to site, they have gained gatekeepers who have power over what they see.

That is from Nancy Scola.

Andrew M August 28, 2014 at 2:38 pm

Yes, of course it’s market segmentation. This is Economics 101: hardly worthy of your blog. Coming next: cellular plans which charge more if you need to access Microsoft Exchange during business hours.

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Steve Sailer August 28, 2014 at 2:41 pm

I worked in a duopoly industry, but it was one where the two firms couldn’t agree how to segment the market and competed furiously for all customers. Both made miserable profits for many years.

From the perspective of management and shareholders, perfect competition is a terrible thing.

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Andrew' August 28, 2014 at 4:51 pm

Tangentially, maybe this is why newspapers have historically been conservative or liberal.

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The Other Jim August 28, 2014 at 7:43 pm

Nobody hates capitalism more than capitalists.

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Phil August 28, 2014 at 2:42 pm

“Gatekeepers who have power over what you see.”

Um, like publishers, who charge more for some books than others? Like cable companies, who charge extra for certain channels? Like internet providers, who already charge by the byte instead of by the value of the content?

And this from the Washington Post, who gives away their website free but charges for their paper.

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Nathan W August 28, 2014 at 3:02 pm

More like a company leasing you your mailbox and deciding which paper or mail was allowed to be put into it, or a company selling you a TV with an exclusivity requirement which dictated which service provider to use, which could then gatekeep all your content, or a phone service provider which effectively hard wire packages of software so that your phone only works properly if you use the gatekeeper that they have determined will maximize their revenues.

This is all highly consistent with behaviours we would expect from a firm operating according to the logic of 1st and 2nd year economics.

All the same the examples you provide are also instructive. I’m presenting an opposing side of the argument. If no one makes it, we could go there.

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Bill August 28, 2014 at 3:42 pm

Not really. If I have free access to Facebook it doesn’t prohibit me from going to other sites – quite the contrary. Instead of burning some of my data usage on FB I can now use it on the other sites. So, for example, I could spend more time on Marginal Revolution without hitting my plan limit since the minutes I spend on FB don’t count.

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derek August 28, 2014 at 10:30 pm

Welcome to the Post Office and the FCC. Try watching a movie the way you want to, or listen to music the way you want to some time.

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jtf August 28, 2014 at 2:55 pm

And yet net neutrality regulations are job-killing and choice-limiting, eh?

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Nathan W August 28, 2014 at 3:05 pm

Amazing how perspectives on choice and control are affected by the size of thhe bank account represented.

Net neutrality would benefit everyday consumers, small business, and act as a safeguard for democracy and freedom by ensuring that indie media could not see its access to bandwidth “shaped”.

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Nathan W August 28, 2014 at 3:05 pm

Is there any doubt where Facebook stands on “type” with respect to any respect for any remote sense of interest in what consumers actually want, or benefitting them in any sort of way, beyond the ability to use that to extract money and personal data from them whether or not they want or are aware of it, and whether or not it pushes legal boundaries and crosses ethical lines by the boat load?

For example, is it OK for a company with such enormous resources to do business with “firms” which insert fine print into games which allow them to charge $3 for a daily “informational” SMS?

No, that’s a scam. Facebook knew it was happening, shared in the proceeds, and did nothing to stop it. That’s just one example.

As for privacy, they routinely rewrite policy in misleading ways and take ownership of user data in highly opaque manners.

I would never trust Facebook as my gatekeeper or provider of any service whatsoever. The only reason I still have an account is that I tried to delete it hundreds of times and somehow I’m just plain and simply so stupid that I can’t get those fuzzy numbers and letters right.

Perhaps one day Wikipedia will open up some commercial/marketing services to help subsidize its user produced encyclopedia service.

Amazon … wouldn’t “trust” it, but they haven’t abused it either.

Music streaming services are a cool idea, but I’d far rather own the content outright. Call me crazy, and I know it sounds almost like it when presenting this kind of paranoid concern, but I’d rather not chance “fight for your country, join the army” (or whatever Facebook’s social engineering algorithms had determined were most appropriate for me) surreptitiously inserted into my private music streaming in ways that could never possibly make it through the public radio without getting caught. OK, but that’s just me. I think they will do very cool things with those services.

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Andrew' August 28, 2014 at 4:49 pm

It is all a huge PIA. Without hands on the CD it gets trapped on an old device. The CD is a PIA too, but at least I have ‘access’ (heh). Without a plasma shot fired, we work for the machines.

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Andrew' August 28, 2014 at 4:45 pm

There are things everyone should see, like Transformers 4. Why shouldn’t those be broadcast to our DVRs at off-peak hours to optimize bandwidth? Then the rest can be devoted to the long-tail. Maybe Netflix already does this but I don’t have anything like it.

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derek August 28, 2014 at 4:57 pm

You know, I am with you guys being sketched out by this, but I would super love to get unlimited music on my non-unlimited data plan.

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responsible D August 28, 2014 at 5:39 pm

It’s a resurrection of the old AOL walled garden model. Remember when they finally had to bow to pressure and offer “the Internet” as one of their features?

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Bill August 28, 2014 at 7:19 pm

First, this is competitive price discrimination. Very simply, this is a form a discounting by TMobile.

Second, what this really is is the end of radio as we know it. Today, your radio station doesn’t face costless competition through your handheld device from a distant radio station….you use minutes, and get charged for accessing, a radio station on your handheld device…unless you use Tmobile which permits you to access out of market radio stations at no cost through your handheld device.

This Tmobile announcement not only changes competition dynamics between cellphone plans, but also between cellphone plans and over the air radio broadcasters.

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Nathan W August 29, 2014 at 12:29 pm

A good announcer can make traditional radio worth it for the consumer, in my opinion, but that doesn’t mean the business model will necessarily remain for eternity.

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The Other Jim August 28, 2014 at 7:43 pm

>gatekeepers who have power over what they see.

… which used to be OUR job, dammit!

— The Washington Post

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prior_approval August 29, 2014 at 1:35 am

N.B. – buy the movie at Amazon, with a direct link within a Post posting – http://www.washingtonpost.com/lifestyle/style/after-40-years-on-the-air-in-washington-arch-campbell-says-goodbye–sort-of/2014/08/27/fbec111c-2e17-11e4-9b98-848790384093_story.html

Bezos is way ahead of you when it comes to paradigms and how to wring synergy out of demolishing older ones.

And doesn’t Amazon already provide a wide variety of similar such services, from a broader perspective – whether Prime, or ‘backup’ of purchased e-books, etc.

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8 August 28, 2014 at 9:38 pm

This is the Apple business model. Also AOL. Both indicate limiting choices is profitable, and Apple made consumer fascism chic. No need for that Weimar like mess of an Unternet.

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Jeff B August 29, 2014 at 10:09 am

What? Last I checked, I could get the entire internet on all my Apple devices. Just because they have a limited, non-confusing and highly accessible product range (which the market is saying is the right thing to do and you can see other companies trying to slim down to copy their success), doesn’t mean it’s “consumer fascism”

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Careless August 31, 2014 at 1:26 pm

You’re wrong, you can’t get every site on an apple device.

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mulp August 28, 2014 at 9:43 pm

This is just the initial phase of massive “wealth” destruction.

The market is saturated with only people with no money or zero interest in a cell phone not already owning a cell phone in the US.

The untapped market is a “netzero” smartphone that gives you free phone service if you watch the ads targeted at the poor or tightwads.

Otherwise, three providers are fighting to take customers away from the other two.

T-Mobile is willing to accept lower margins to get some of the customers of the other two, but it will upsell to a slightly higher margin lower than the other two. In the end, margins for all three will fall and profits will vanish and become only fair returns on capital assets, and all will be declared bankrupt, sorta like IBM was declared bankrupt when margins on hardware fell so much it made no sense for IBM to make and sell hardware to the masses.

When business profits are locked to returns on capital assets with the customer growth not justifying investing in capital assets, the cell phone carriers will be as exciting as the land line telcos.

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Nathan W August 29, 2014 at 12:30 pm

What is an acceptable risk-adjusted return in a mature industry?

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Andrew August 28, 2014 at 11:56 pm

I would much prefer a world in which bandwidth was free and people paid for content, even if indirectly through advertising. Isn’t this the model that created and sustained newspapers and allows people to actual earn a living creating content.

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Nathan W August 29, 2014 at 12:36 pm

This would require forcing IT service providers to be dumb pipes. This will be resisted by big players who produce content and wish to obtain monopoly rents from both the pipes and the stuff going through the pipes. Owning the pipes makes it easier for them to control access to what’s in them. Which is why net neutrality should be defended, absolutely, unless we separate the pipes from what it going through them.

The pipes should be treated as a utility service, eventually, but not before we might reasonably suppose that technical gains are exhausted. You can only fit so many 0s and 1s through a physical medium and across so many passers of information. Mobile aside, I’m not aware of many good arguments to suggest that dump pipes will become sufficiently smarter pipes to justify market dynamics which are tantamount to both vertical and horizontal integration which should be of concern to competition bureaus (more relevant in Canada than USA, I think).

Similarly, once water utilities were essentially in place, you could hardly have argued against the “reasonable returns in utilities” argument in water supply systems on the basis that someone might one day figure out a way to locally convert sewage into drinking water.

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derek August 29, 2014 at 1:45 pm

The CRTC had a policy for a while which prevented the three big cell phone providers from dropping their prices. The rationale was that higher prices would encourage competition. It didn’t, it simply meant higher prices.

SOMEONE SOMEWHERE IS RESPONDING TO CONSUMER DEMAND. IT MUST BE STOPPED!

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